Court hears oral arguments in challenge to 2013 RFS standard

On April 7, the U.S. Court of Appeals for the District of Columbia heard oral arguments in a lawsuit challenging the U.S. EPA’s final rule for 2013 renewable fuel standard (RFS). The petitioners are asking the court to vacate the EPA’s rulemaking that set 2013 volume requirements for the RFS.

The lawsuit was originally filed in October 2013 by Monroe Energy LLC, a refiner of petroleum products that is wholly owned by Delta Air Lines Inc. The case was later consolidated with similar challenges filed by the American Petroleum Institute and American Fuel & Petrochemical Manufacturers. Growth Energy, the Renewable Fuels Association, the Biotechnology Industry Organization and National Biodiesel Board have intervened in the case in support of the EPA.

During the hearing, attorney David DeBruin, who represents Monroe Energy, argued that the EPA’s 2013 RFS rule must be vacated because it poses “devastating costs” on his client and other obligated parties that cannot overcome structural barriers to greater use of renewable fuel.

DeBruin also spoke about the EPA’s delay in finalizing the 2013 rule. The agency missed the November 2012 statutory deadline to finalize the 2013 rule, and instead issued the final rulemaking in August 2013. At that time, the EPA also announced the 2013 compliance deadline would be extended by four months, and set the new compliance deadline for June 30, 2014.

His argument focused, in part, on the relationship between the 2013 and 2014 rulemaking and the issue of carry over renewable identification numbers (RINs). The EPA in its decision, he said, upheld the late promulgation of the rule, stating that obligated parties would have sufficient time to comply in 2013 because it would issue the 2014 rule in advance of the 2013 compliance deadline. “It recognized that the issuance of the 2014 rule would be critical to whether parties would essentially use their RINs or carry forward their RINs,” he said. DeBruin further argued that problem is that up to 3.6 billion 2013 RINs could potentially be used to satisfy the 2014 obligation, and that the EPA did not fully take that fact into account. “This is a two-year currently that the EPA has created. RINs can be used for two years,” DeBruin said, noting that it makes no sense to his client that EPA would consider only 2013 RINs in establishing there are enough RINs without considering the fact that 2013 RINs can be carried forward into 2014. He elaborated his client’s position by saying that the EPA said in its rulemaking that there should be at least 1.2 billion RINs left over at the end of 2013 taking into account 2012 carryover. Since 20 percent of a RINs generated in a given year can be carried over, he suggested that the 3.6 billion 2013 RINs that can be carried over into 2014 created a 2.5 billion shortfall of 2013 RINs since only 1.2 billion RINs were carried over from 2012 to 2013.

Responding to a question from one of the three panel judges, DeBruin said the court should find the EPA’s rule arbitrary and capricious. “The point is the agency must set a rule that obligated parties can comply,” he said.

Attorney Rober Long, counsel for API and AMPM, questioned the EPA’s use of updated estimates of total transportation fuel consumption in the final rule. EPA did that without any prior notice or an opportunity to comment, he said. While the updated data came from the U.S. Energy Information Administration, Long essentially argued that the EPA should have used data that is in line with the EPA’s statutory deadline to finalize the 2013 rule because it provides regulatory certainty. The EPA, however, used EIA estimates of total transportation fuel consumption that were released after that statutory deadline. “We would say that because you have not adhered to the deadline—you have not provided the regulatory certainty that Congress said the obligated parties are entitled too, you should not, in that circumstance, take this decision of using updated data that increases the obligations of the parties in the middle of year,” Long said.

Attorney Lisa Bell, counsel for the EPA, said the petitioners are essentially arguing that the EPA must minimize the volumes of renewable fuels set by Congress in order to maximize their compliance flexibility under the RFS. “Yet, EPA’s primary duty under the program is to ensure that certain volumes of renewable fuels set by Congress are met each year,” she said.

She outlined three reasons why the EPA’s 2013 RFS rulemaking should be upheld by the court. “First, EPA’s consideration of both projected available renewable fuels and carryover RINs is consistent with the language and purposes of the statute. Second, EPA reasonably accounted for RIN banking in determining not to reduce the statutory volumes. Finally, EPA reasonably considered increases in RIN prices in the final rule,” Bell said.

“The RIN system is a market-based system that gives obligated parties choices,” she continued. “EPA does not make these choices—obligated parties do. So, it’s reasonable for EPA not to focus on these individual choices or use nationally applicable statutory volumes in order to mitigate fluctuations in certain compliance choices for obligated parties. Monroe as an independent refiner isn’t in some special position in terms of the obligated parties. Importers of conventional fuel are also in the same position in terms of the options that they have to comply with the act. So this dichotomy between integrated refiners and independent refiners is somewhat of an incomplete picture of the obligated parties under the act.”

Attorney Brian Lynk also represented EPA at the hearing. He spoke about the delay in issuing the 2013 rule. Lynk noted that final rules for the 2008 and 2011 RFS standards were actually signed prior to statutory deadline, with 2012’s signed a few weeks after the deadline. The delays in the 2010 and 2013 rulemakings, he said, can be attributed to the fact that EPA was dealing with new issues. In 2010, the agency was transitioning from the RFS1 program to the RFS2 program. This year, he said, it was a question of the E10 blend wall.

“This is not the timetable that Congress intended,” he said. “But, I think it’s fair to say it is at least understandable when novel policy issues come up, it does sometimes take longer for the agency to address them.”

Lync also noted that talk of an escalating blend wall problem in the future would be no reason to set aside the 2013 RFS rule. In addition, he stressed that when the 2013 proposal was signed, obligated parties understood that they were going to have to comply with the full statutory volumes. EPA was not proposing to reduce them.

Attorney David Salmons, counsel for those that intervened on behalf of the EPA, said that while the court should uphold the 2013 volumes, the groups he represents urge the court not to address EPA’s claim of broad discretion to consider such factors as the ethanol blend wall in deciding whether to waive the volumes. “This case asks only whether it was arbitrary and capricious for EPA to enforce the volumes,” he said. “The court can answer that without deciding whether the discretion to waive is broad or narrow.”

“In contrast, EPA has indicated in its 2014 notice of proposed rulemaking that they may waive the volumes next year based in part on blend wall considerations. If it does so, then the question of the scope of EPA’s discretion to waive will be properly presented and the court can decide that issue with the benefit of full contested briefing,” Salmons said.

However, if the court does address the issue of discretion, Salmons said the EPA should reject EPA’s claim of broad waiver discretion because it is insufficient with the text and structure of the act. “Congress mandated that increasing annual volumes be used and expected EPA to enforce them,” he said.

On the question of adequate supply of biofuels to meet the 2013 statutory volumes, Salmons stressed that the total renewable fuels produced in 2013 were sufficient to satisfy the 2013 volumes, even without regard to any carryover RINs. “We think that is an important fact for the court to keep into account in rendering this decision,” he said.

Salmons concluded by stressing that the entire notion that statutory volumes can be waived based on issues like high RIN prices or infrastructure issues like the blend wall makes no sense. “A weakness in demand should not be the basis for waiving statutory volumes that were designed specifically to overcome and counteract weaknesses in demand,” he said. “That is what this whole program is about. It’s about ensuring production and incentivizing investment in resources, infrastructure and others to improve and increase and diversify the use of renewable fuels. Higher RIN prices, for example, encourage increase in…production and use of renewable fuels by sending important signals to both sides of the market. Producers will make more renewable fuels, and obligated parties will have an incentive to invest in infrastructure and other improvements to better use those fuels. The fact that certain obligated parties may not have made those investments with full knowledge all along that these increasing volumes were there is not a reason to waive the volumes.”

“Congress is well aware of these types of concerns about the ethanol blend wall and other supposed infrastructure limitations. But, it saw the annual volumes and the positive market incentives that they create is the best way to resolve those problems. Waiving the statutory volumes based on those pricing or infrastructure concerns gets it exactly backwards,” Solmons continued.

DeBruin asked that the court make its decision as soon as possible, prior to the June 30 compliance deadline faced by his client.

An audio recording of the full hearing can be downloaded from the U.S. Court of Appeals for the D.C. Circuit website.